English Estonian
Published: 2017-11-09 15:30:00 CET
Quarterly report

2017 III quarter and 9 months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the third quarter and nine months of 2017 (unaudited), overview of the key events influencing the period’s financial result, outlook for the market and description of the main risks.

Interim report is attached to the announcement and is also published on NASDAQ Tallinn and Nordecon’s web page (http://www.nordecon.com/for-investor/financial-reports/interim-reports).

Period’s investor presentation are attached to the announcement and are also published on Nordecon’s web page (http://www.nordecon.com/for-investor/investor-presentations).


Condensed consolidated interim statement of financial position

EUR ‘000 30 September 2017 31 December 2016
Current assets    
Cash and cash equivalents 8,062 9,786
Trade and other receivables 47,283 21,055
Prepayments 2,717 1,644
Inventories 26,471 22,992
Total current assets 84,533 55,477
Non-current assets
Investments in equity-accounted investees 1,920 1,640
Other investments 26 26
Trade and other receivables 9,327 10,816
Investment property 4,929 4,929
Property plant and equipment 11,792 11,111
Intangible assets 14,643 14,623
Total non-current assets 42,637 43,145
TOTAL ASSETS 127,170 98,622
Current liabilities    
Borrowings 21,525 6,297
Trade payables 46,023 29,811
Other payables 7,208 5,389
Deferred income 5,905 4,128
Provisions 379 753
Total current liabilities 81,040 46,378
Non-current liabilities
Borrowings 7,501 13,102
Trade payables 98 98
Other payables 118 117
Provisions 1,111 881
Total non-current liabilities 8,828 14,198
Share capital 18,263 19,720
Own (treasury) shares -1,349 -1,550
Share premium 589 564
Statutory capital reserve 2,554 2,554
Translation reserve 1,808 1,549
Retained earnings 14,685 13,091
Total equity attributable to owners of the parent 36,550 35,928
Non-controlling interests 752 2,118
TOTAL EQUITY 37,302 38,046


Condensed consolidated interim statement of comprehensive income

EUR ‘000   9M 2017 Q3 2017 9M 2016 Q3 2016 2016
Revenue    174,909  71,408  133,570  59,741 183,329
Cost of sales   -168,141 -67,779 -124,979 -55,303 -172,350
Gross profit   6,768 3,629 8,591 4,438 10,979
Marketing and distribution expenses   -448 -114 -279 -61 -413
Administrative expenses   -5,375 -2,297 -4,629 -1,847 -6,106
Other operating income   98 44 148 51 362
Other operating expenses   -130 -23 -539 -79 -614
Operating profit   913 1,239 3,292 2,502 4,208
Finance income   2,802 2,598 336 101 463
Finance costs   -726 -298 -785 -319 -1,088
Net finance income/costs   2,076 2,300 -449 -218 -625
Share of profit of equity-accounted investees    518  325  717  233 609
Profit before income tax   3,507 3,864 3,560 2,517 4,192
Income tax expense   -791 -251 -245 0 -259
Profit for the period   2,716 3,613 3,315 2,517 3,933
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations   259 132 239 127 191
Total other comprehensive income   259 132 239 127 191
TOTAL COMPREHENSIVE INCOME   2,975 3,745 3,554 2,644 4,124
Profit attributable to:            
- Owners of the parent   2,978 3,868 2,437 2,011 3,044
- Non-controlling interests   -262 -255 878 506 889
Profit for the period   2,716 3,613 3,315 2,517 3,933
Total comprehensive income attributable to:            
- Owners of the parent   3,237 4,000 2,676 2,138 3,235
- Non-controlling interests   -262 -255 878 506 889
Total comprehensive income for the period   2,975 3,745 3,554 2,644 4,124
Earnings per share attributable to owners of the parent:            
Basic earnings per share (EUR)   0.10 0.12 0.08 0.07 0.10
Diluted earnings per share (EUR)   0.10 0.12 0.08 0.07 0.10


Condensed consolidated interim statement of cash flows

EUR ‘000 9M 2017 9M 2016
Cash flows from operating activities    
Cash receipts from customers1 183,759 137,502
Cash paid to suppliers2 -170,133 -119,130
VAT paid -4,479 -4,643
Cash paid to and for employees -17,063 -14,832
Income tax paid -325 -245
Net cash used in operating activities -8,241 -1,348
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -292 -145
Paid on acquisition of intangible assets -5 -25
Proceeds from sale of property, plant and
48 97
Disposal of investments in subsidiaries and a joint venture 2,744 6
Loans provided -38 -40
Repayment of loans provided 1,487 40
Dividends received 153 153
Interest received 377 0
Sale of own shares 153 0
Net cash from investing activities 4,627 86
Cash flows from financing activities    
Proceeds from loans received 7,457 7,166
Repayment of loans received -720 -1,520
Finance lease principal paid -1,758 -1,831
Interest paid -589 -523
Dividends paid -2,488 -1,068
Net cash from financing activities 1,902 2,224
Net cash flow -1,712 962
Cash and cash equivalents at beginning of period 9,786 6,332
Effect of movements in foreign exchange rates -12 -6
Decrease in cash and cash equivalents -1,712 962
Cash and cash equivalents at end of period 8,062 7,288

1 Line item Cash receipts from customers includes VAT paid by customers.

2 Line item Cash paid to suppliers includes VAT paid.


Financial review

Financial performance

Nordecon Group ended the first nine months of 2017 with a gross profit of 6,768 thousand euros (9M 2016: 8,591 thousand euros) and a gross margin of 3.9% (9M 2016: 6.4%). The weakening of the gross margin stemmed mainly from the Buildings segment whose gross margin dropped to 4.3% (9M 2016: 8.1%). The year-on-year decline in the gross margin is attributable to growth in input costs, particularly materials and labour. Our performance is strongly influenced by the insufficient availability of skilled labour and thus also the shortage of subcontractors in the building construction segment where the number of buildings under construction is large for the Estonian market. This allows subcontractors to raise their prices, which puts pressure on general contractors’ profit margins. We have been highlighting the fact that market forces are undermining profitability since the second half of 2016. The weakening of the gross margin is also attributable to the loss of the Swedish subsidiary that incurred some interior work costs in the final stage of its first construction contract which could not be sufficiently accurately estimated in the new market. The performance of our Infrastructure segment improved somewhat compared to the same period last year, its gross margin rising to 3.9% (9M 2016: 3.7%).

Administrative expenses for the first nine months of 2017 totalled 5,375 thousand euros. Compared with a year earlier, administrative expenses grew substantially (9M 2016: 4,629 thousand euros), mainly through the termination benefits paid to two board members of Nordecon AS that stepped down and the council’s decision to increase the number of the company’s board members. Despite changes in the composition of the board, structural streamlining, and sustained investment in foreign markets which in the start-up phase is inevitably accompanied by planned growth in administrative expenses, our cost-control measures continued to produce good results and we were able to keep administrative expenses below the target ceiling of 4% of revenue. The ratio of administrative expenses to revenue (12 months rolling) was 3.0% (9M 2016: 3.8%).

Operating profit for the first nine months of 2017 amounted to 913 thousand euros (9M 2016: 3,292 thousand euros). EBITDA was positive at 2,419 thousand euros (9M 2016: 4,723 thousand euros).

Finance income for the period amounted to 2,802 thousand euros (9M 2016: 336 thousand euros). A significant share of this resulted from the sale of our investments in the joint venture Unigate OÜ and the subsidiaries Paekalda 2 OÜ, Paekalda 3 OÜ, Paekalda 7 OÜ and Paekalda 9 OÜ, which generated a gain of 2,527 thousand euros.

The Group’s exchange losses from adverse movements in the euro/Ukrainian hryvnia exchange rate were similar to a year earlier. In the first nine months of 2017, the Ukrainian currency weakened against the euro by around 9%, which meant that Group entities whose functional currency is the hryvnia had to restate their euro-denominated liabilities. Exchange losses reported in finance costs totalled 247 thousand euros (9M 2016: 251 thousand euros). The same movements in the exchange rate increased the translation reserve in equity by 259 thousand euros (9M 2016: 239 thousand euros) and the net effect of the exchange differences on the Group’s net assets was a gain of 12 thousand euros (9M 2016: a loss of 12 thousand euros).

The Group’s net profit amounted to 2,716 thousand euros (9M 2016: 3,315 thousand euros), of which net profit attributable to owners of the parent, Nordecon AS, was 2,978 thousand euros (9M 2016: 2,437 thousand euros).

Cash flows

In the first nine months of 2017, operating activities produced a net cash outflow of 8,241 thousand euros (9M 2016: a net outflow of 1,348 thousand euros). Although cash receipts from customers exceeded cash paid to suppliers, operating cash flow proved negative due to VAT paid and payments made to and for employees. Operating cash flow continues to be strongly affected by the fact that neither public nor private sector customers have the obligation to make advance payments while the Group has to make prepayments to subcontractors, materials suppliers, etc. In addition, cash inflow is reduced by contractual retentions, which extend from 5 to 10% of the contract price and are released at the end of the construction period only.

Investing activities produced a net cash inflow of 4,627 thousand euros (9M 2016: an inflow of 86 thousand euros). Cash flows from investing activities were strongly influenced by the sale of the investment in the joint venture Unigate OÜ for 2,744 thousand euros and loan principal and interest of 1,461 thousand euros and 329 thousand euros respectively collected through the transaction. Investments in property, plant and equipment and intangible assets totalled 297 thousand euros (9M 2016: 170 thousand euros) and dividends received amounted to 153 thousand euros (9M 2016: 153 thousand euros). Own shares sold during the reporting period generated income of 153 thousand euros.

Financing activities generated a net cash inflow of 1,902 thousand euros (9M 2016: an inflow of 2,224 thousand euros). Our financing cash flow is strongly influenced by loan and finance lease transactions. Proceeds from loans received amounted to 7,457 thousand euros, consisting of development loans received and the use of overdraft facilities (9M 2016: 7,166 thousand euros). Loan repayments totalled 720 thousand euros (9M 2016: 1,520 thousand euros) consisting of scheduled repayments of long-term investment and development loans. Finance lease payments decreased slightly, amounting to 1,758 thousand euros (9M 2016: 1,831 thousand euros). Dividends paid in the first nine months of 2017 totalled 2,488 thousand euros (9M 2016: 1,068 thousand euros).

At 30 September 2017, the Group’s cash and cash equivalents totalled 8,062 thousand euros (30 September 2016: 7,288 thousand euros). Management’s commentary on liquidity risks is presented in the chapter Description of the main risks.

Key financial figures and ratios

Figure/ratio for the period 9M 2017 9M 2016 9M 2015 2016
Revenue (EUR ‘000) 174,909 133,570 113,553 183,329
Revenue change 30.9% 17.6% -6.1% 26%
Net profit (EUR ‘000) 2,716 3,315 2,317 3,933
Net profit attributable to owners of the parent (EUR ‘000) 2,978 2,437 2,482 3,044
Weighted average number of shares 30,913,031 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.10 0.08 0.08 0.10
Administrative expenses to revenue 3.1% 3.5% 3.0% 3.3%
Administrative expenses to revenue (rolling) 3.0% 3.8% 3.3% 3.3%
EBITDA (EUR ‘000) 2,419 4,723 4,187 6,017
EBITDA margin 1.4% 3.5% 3.7% 3.3%
Gross margin 3.9% 6.4% 5.5% 6.0%
Operating margin 0.5% 2.5% 2.5% 2.3%
Operating margin excluding gain on asset sales 0.5% 2.4% 2.3% 2.2%
Net margin 1.6% 2.5% 2.0% 2.1%
Return on invested capital 6.5% 6.8% 5.0% 8.5%
Return on equity 7.2% 9.0% 6.2% 10.6%
Equity ratio 29.3% 33.2% 35.9% 28.6%
Return on assets 2.4% 3.3% 2.3% 4.2%
Gearing 31.6% 28.3% 33.4% 16.7%
Current ratio 1.04 1.05 1.07 1.20
As at 30 Sept 2017 30 Sept 2016 30 Sept 2015 31 Dec 2016
Order book (EUR ’000) 142,553 133,846 76,261 131,335

Revenue change = (revenue for the reporting period / revenue for the previous period) – 1 * 100
Earnings per share (EPS) = net profit or loss attributable to owners of the parent / weighted average number of shares outstanding
Administrative expenses to revenue = (administrative expenses / revenue) * 100
Administrative expenses to revenue (rolling) = (past four quarters’ administrative expenses / past four quarters’ revenue) * 100
EBITDA = operating profit or loss + depreciation and amortisation + impairment losses on goodwill
EBITDA margin = (EBITDA / revenue) * 100
Gross margin = (gross profit or loss / revenue) * 100
Operating margin = (operating profit or loss / revenue) * 100
Operating margin excluding gain on asset sales = ((operating profit or loss – gain on sales of non-current assets – gain on sales of real estate) / revenue) * 100
Net margin = (net profit or loss for the period / revenue) * 100
Return on invested capital = ((profit or loss before tax + interest expense) / the period’s average (interest-bearing liabilities + equity)) * 100
Return on equity = (net profit or loss for the period / the period’s average total equity) * 100
Equity ratio = (total equity / total liabilities and equity) * 100
Return on assets = (net profit or loss for the period / the period’s average total assets) * 100
Gearing = ((interest-bearing liabilities – cash and cash equivalents) / (interest-bearing liabilities + equity)) * 100
Current ratio = total current assets / total current liabilities


Performance by geographical market

In the first nine months of 2017, Nordecon earned around 5% of its revenue outside Estonia, compared with 7% in the same period last year. In terms of foreign markets, the strongest revenue contributor was Sweden where we completed two apartment buildings and continued the design and construction of a third, an 8-floor apartment building. The share of our Ukrainian revenues and business volumes decreased somewhat compared with a year earlier: during the period, we provided services under two building construction contracts. Our Finnish revenues resulted from concrete works in the building construction segment.

  9M 2017 9M 2016 9M 2015 2016
Estonia 95% 93% 96% 93%
Sweden 3% 4% 0% 4%
Ukraine 1% 2% 3% 4%
Finland 1% 1% 1% 1%

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive reliance on one market. However, conditions in some of our selected foreign markets are also volatile and have a strong impact on our current results. Increasing the contribution of foreign markets is one of Nordecon’s strategic targets. Our vision of the Group’s foreign operations is described in the chapter Outlooks of the Group’s geographical markets.


Performance by business line

Segment revenues

We strive to maintain the revenues of our operating segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides better opportunities for continuing construction operations in more challenging circumstances, for example when the operating volumes of a sub-segment decline sharply.

Nordecon’s revenue for the first nine months of 2017 amounted to 174,909 thousand euros, a roughly 31% increase on the 133,570 thousand euros generated in the first nine months of 2016. Although revenue increased in both the Buildings and the Infrastructure segment, the main growth driver was the Buildings segment where growth was underpinned by a rise in the volume of contracts secured from the private sector. The downturn in infrastructure construction, which is affecting the entire Estonian construction market (and the Group’s chosen strategy), has also left its mark on our revenue structure.

In the first nine months of 2017, our Buildings segment and Infrastructure segment generated revenue of 130,618 thousand euros and 42,303 thousand euros respectively. The corresponding figures for the same period in 2016 were 96,647 thousand euros and 34,923 thousand euros (see note 8). Our order book has a similar structure: at the end of the period, 70% of contracts secured but not yet performed was attributable to the Buildings segment (9M 2016: 78%).

Operating segments* 9M 2017 9M 2016 9M 2015 2016
Buildings 75% 72% 61% 73%
Infrastructure 25% 28% 39% 27%

* In the Directors’ report, projects have been allocated to operating segments based on their nature (i.e., building or infrastructure construction). In the segment reporting presented in the financial statements, allocation is based on the subsidiaries’ main field of activity (as required by IFRS 8 Operating Segments). In the financial statements, the results of a subsidiary that is primarily engaged in infrastructure construction are presented in the Infrastructure segment. In the Directors’ report, the revenues of such a subsidiary are presented based on their nature. The differences between the two reports are not significant because in general Group entities specialise in specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in both building and infrastructure construction. The figures for the parent company are allocated in both parts of the interim report based on the nature of the work.


Sub-segment revenues

In the Buildings segment, the revenue contributions of all sub-segments were quite similar. Only the revenue of the apartment buildings sub-segment, where we earned most of our revenue as a general contractor, was slightly larger than the rest. In Estonia, a substantial share of our apartment building projects is located in Tallinn. During the period under review, the largest projects were the Meerhof 2.0 apartment building complex at Pirita tee 20a and apartment buildings at Sõjakooli 12 (phase 2) and Virbi 10. The contribution of foreign markets sustained growth. In Ukraine, we continued to build a residential quarter in the city of Brovary in the Kiev region. In Sweden, we completed two apartment buildings and continued the design and construction of a third, an 8-floor apartment building, in Stockholm.

We continued work on our own housing development projects (reported in the apartment buildings sub-segment) in Tartu and Tallinn. In the Tammelinn project in Tartu, we completed phase 5, which consists of a four-floor building with 24 apartments, continued work on phase 6 and made preparations for launching the construction of phase 7 (www.tammelinn.ee). In Tallinn, we completed the fifth and last terraced house in our Magasini 29 development project (www.magasini.ee) and two apartment buildings with a total of 30 apartments in Hane street. The period’s housing development revenues totalled 4,431 thousand euros (9M 2016: 3,012 thousand euros). In carrying out development activities, we monitor closely potential risks in the housing development market that stem from rapid growth in the supply of new housing and growth in input prices.

The revenues of the commercial buildings sub-segment grew considerably compared with the first nine months of 2016. We completed the renovation of the machinery hall of the historical Luther furniture factory into a modern office building and the construction of the office and commercial complex Viimsi Äritare. We continued to build an office building at Lõõtsa 12, the Öpiku B building and a multi-storey car park at Lõõtsa 11 in Ülemiste City and the Martens house in Pärnu. Based on our order book, we expect the commercial buildings sub-segment to post year-on-year revenue growth at the year-end.

The revenues of the industrial and warehouse facilities sub-segment grew year on year. The period’s largest projects were the construction of Harmet’s production and warehouse facilities at Kumna, near Tallinn, a co-generation plant at Kehra, a cattle shed complex at Kogula, and the Metsä Wood plywood factory in Pärnu.

The revenue contribution of the public buildings sub-segment decreased compared with a year earlier. The revenues of this sub-segment have been strongly influenced by growth in the state’s investment in national defence. During the period, we delivered to the customers the building of Ugala Theatre in Viljandi, the Lintsi warehouse complex, and a depot, infrastructure for armoured vehicles, a canteen and a barracks at the Tapa military base. We began building an academic building for the Estonian Academy of Security Sciences.

Revenue breakdown in the Buildings segment 9M 2017 9M 2016 9M 2015 2016
Apartment buildings 31% 32% 20% 34%
Commercial buildings 24% 15% 56% 16%
Industrial and warehouse facilities 23% 22% 11% 20%
Public buildings 22% 31% 13% 30%

For a long time, the main revenue source in the Infrastructure segment has been road construction and maintenance, which posted 17% year on year revenue growth in the first nine months of 2017 although its contribution to the Infrastructure segment’s revenues decreased somewhat. In contrast to two previous years, when most of the sub-segment’s revenues resulted from small or medium-sized reconstruction or rehabilitation projects, this year we have been working on four major contracts: the construction of a 2+1 road (a road with passing lanes) on the Ääsmäe-Kohatu section of the Tallinn-Pärnu-Ikla road which was secured at the end of 2016 and the reconstruction of the Haabersti intersection in Tallinn, the construction of a 2+1 road on the Valmaotsa–Kärevere section of the Tallinn–Tartu–Võru–Luhamaa road, and the reconstruction of a section of the Tallinn ring road (km 0.6-2.8) which were secured in 2017. We continued to render road maintenance services in Järva and Hiiu counties and the Keila and Kose maintenance areas in Harju county. A substantial share of the period’s revenues also resulted from forest road improvement services provided to the State Forest Management Centre.

The contracts secured by the environmental engineering and other engineering (utility network construction) sub-segments are small and significant growth of the sub-segments’ revenues is unlikely. At the date of release of this report, there is no sign of any major hydraulic engineering projects to be announced and demand for other complex and large-scale engineering work also tends to be irregular.

Revenue breakdown in the Infrastructure segment 9M 2017 9M 2016 9M 2015 2016
Road construction and maintenance 84%                   86% 82% 86%
Other engineering 12% 9% 13% 9%
Environmental engineering 4% 5% 4% 5%
Specialist engineering (including hydraulic engineering) 0% 0% 1% 0%


Order book

At 30 September 2017, the Group’s order book (backlog of contracts signed but not yet performed) stood at 142,553 thousand euros, 7% up on a year ago. In the third quarter, we secured new contracts of 66,371 thousand euros.

As at 30 Sept 2017 30 Sept 2016 30 Sept 2015 31 Dec 2016
Order book (EUR ‘000) 142,553 133,846 76,261 131,335

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 70% and 30% of the Group’s order book respectively (30 September 2016: 78% and 22% respectively).

Compared with the same period in 2016, the order book of the Buildings segment decreased by around 5%. The order books of the public buildings and the apartment buildings sub-segments declined at a similar rate. Despite that, the order book of the apartment buildings sub-segment is the second-largest after that of the commercial buildings sub-segment. The order book of the apartment buildings sub-segment is influenced by large contracts secured in 2016 for the construction of the Meerhof 2.0 apartment building complex at Pirita tee 20a and apartment buildings at Sõjakooli 12 in Tallinn and five apartment buildings in the city of Brovary in Kiev region in Ukraine. In 2017, we have increased our order book with contracts for the construction of an eight-floor apartment building (Väsby Terrass) in Sweden and the design and construction of three apartment buildings at Kakumäe in Tallinn. The largest contracts in the order book of the public buildings sub-segment are the construction of an academic building for the Estonian Academy of Security Sciences and the Abja Health Centre building which were secured in the third quarter of 2017. The order books of the commercial buildings and the industrial and warehouse facilities sub-segments have increased substantially, the first primarily through the contracts for the construction of a multi-storey car park at Sepise 8 in Ülemiste City and the design and construction of a 14-floor commercial and residential building at Mustamäe tee 3 in the WoHo quarter in Tallinn. The sub-segment’s order book has also grown through the contract for the construction of a 7-floor office building in the Unit City innovation park in Kiev, which was signed in the third quarter. In the first quarter of 2017, we secured a contract for building a plywood factory for Metsä Wood in Pärnu, which increased the order book of the industrial and warehouse facilities sub-segment. Orders placed by the agricultural sector have increased as well.

Compared with a year ago, the order book of the Infrastructure segment has grown by around 45%. Most of the increase is attributable to the road construction and maintenance sub-segment whose order book accounts for 91% of the segment’s order book. The largest projects in the road construction order book are the contracts signed in 2017 for the reconstruction of the Haabersti intersection in Tallinn, the reconstruction of a section of the Tallinn ring road (km 0.6-2.8) and the construction of a 2+1 road on the Valmaotsa–Kärevere section of the Tallinn–Tartu–Võru–Luhamaa road. We continue to provide road maintenance services in four road maintenance areas: Keila, Järva, Hiiu, and Kose. The order book of the environmental engineering sub-segment has been supplemented with a contract for the construction of a water treatment plant in Kiev, Ukraine. According to our projections, in 2017 public investments will not increase substantially. Nevertheless, based on our order book as at the reporting date we expect that in 2017 the revenue of the Infrastructure segment will grow slightly compared to 2016 (for further information, see the Business risks section of the chapter Description of the main risks).

Based on the size of the Group’s order book and known developments in our selected markets, we project year-on-year revenue growth for 2017. In an environment of stiff competition, we try to avoid taking unjustified risks whose realisation in the contract performance phase would have an adverse impact on our results. Despite this, where suitable opportunities arise, we strive to counteract market-triggered margin compression by increasing the portfolio. Our preferred policy is to keep fixed costs under control and monitor market developments.

Between the reporting date (30 September 2017) and the date of release of this report, Group companies have secured additional construction contracts in the region of 35,060 thousand euros.



Employees and personnel expenses

In the first nine months of 2017, the Group (the parent and the subsidiaries) employed, on average, 739 people including 425 engineers and technical personnel (ETP). The number of employees, particularly the ETP staff, has increased year on year by around 9% in connection with growth in the Group’s business operations.

Average number of the Group’s employees (at the parent and the subsidiaries)

  9M 2017 9M 2016 9M 2015 2016
ETP 425 374 357 381
Workers 314 305 342 303
Total average 739 679 699 684

Our personnel expenses for the first nine months of 2017 including all taxes totalled 16,343 thousand euros (9M 2016: 14,898 thousand euros), a roughly 10% increase year on year. The growth in personnel expenses is mainly attributable to a larger headcount.

The service fees of the members of the council of Nordecon AS for the first nine months of 2017 amounted to 120 thousand euros and associated social security charges totalled 40 thousand euros (9M 2016: 145 thousand euros and 48 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 923 thousand euros and associated social security charges totalled 272 thousand euros (9M 2016: 480 thousand euros and 158 thousand euros respectively). The figures include termination benefits of 550 thousand euros paid to two board members in the third quarter and associated social security charges of 182 thousand euros (9M 2016: nil euros). In addition, the board’s compensation has grown because the number of board members has increased.


Labour productivity and labour cost efficiency

We measure the efficiency of our operating activities using the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses incurred:

  9M 2017 9M 2016 9M 2015 2016
Nominal labour productivity (rolling), (EUR ‘000) 308.1 245.1 217.5 268.0
Change against the comparative period 25.7% 12.7% -0.6% 27%
Nominal labour cost efficiency (rolling), (EUR) 10.3 8.2 8.2 9.0
Change against the comparative period 24.8% 0.6% 9.8% 12.8%

Nominal labour productivity (rolling) = (past four quarters’ revenue) / (past four quarters’ average number of employees)
Nominal labour cost efficiency (rolling) = (past four quarters’ revenue) / (past four quarters’ personnel expenses)

The Group’s nominal labour productivity and labour cost efficiency increased year on year, mainly through revenue growth (see the section Employees and personnel expenses).


Description of the main risks

Business risks

The main factors which affect the Group’s business volumes and profit margins are competition in the construction market and changes in the demand for construction services.

Competition continues to be stiff in all segments of the construction market and in 2017 public investment is not expected to grow substantially compared with 2016. Thus, builders’ bid prices are under strong competitive pressure in a situation where the prices of construction inputs have been trending upwards moderately but consistently for several quarters. Bidders include not only rival general contractors but also former subcontractors. This is mainly attributable to the state and local governments’ policy to keep the qualification requirements of public procurement tenders low, which sometimes results in the sacrifice of quality and adherence to deadlines to the lowest possible price. We acknowledge the risks inherent in the performance of contracts signed in an environment of stiff competition and rising input prices. Securing a long-term construction contract at an unreasonably low price in a situation where input prices cannot be lowered noticeably and competition is tough is risky because negative developments in the economy may quickly render the contract onerous. In setting our prices in such an environment, we focus on ensuring a reasonable balance of contract performance risks and tight cost control.

Demand for construction services continues to be strongly influenced by the volume of public investment, which in turn depends on the co-financing received from the EU structural funds. Total support allocated to Estonia during the current EU budget period (2014-2020) amounts to 5.9 billion euros. Although the amount exceeds the figure for the previous financial framework, the amounts earmarked for construction work are substantially smaller than in the previous budget period. Projects supported by the EU during the 2014-2020 financial framework began to have some impact on the construction sector in the second half of 2016 and in the following years the process is expected to accelerate.

In the light of the above factors, we see some opportunities for achieving year-on-year business growth in 2017 and 2018: business growth in Estonia is also supported by positive developments in our selected foreign markets. Our action plan foresees flexible resource allocation aimed at finding more profitable contracts and performing them effectively. According to its business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in one narrow (and in the current market situation particularly some infrastructure) segment.

Our business is also influenced by seasonal changes in weather conditions, which have the strongest impact on infrastructure construction where a lot of work is done outdoors (road and port construction, earthwork, etc.). To disperse the risk, we secure road maintenance contracts that generate year-round business. Our strategy is to counteract the seasonality of infrastructure operations with building construction that is less exposed to seasonal fluctuations. Our long-term goal is to be flexible and keep our two operating segments in relative balance (see also the chapter Performance by business line). Where possible, our entities implement different technical solutions that allow working efficiently also in changeable conditions.

Operational risks

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific insurance contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount due until the contract has been completed. To remedy construction deficiencies which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 30 September 2017, the Group’s warranty provisions (including current and non-current ones) totalled 1,085 thousand euros (30 September 2016: 1,117 thousand euros).

In addition to managing the risks directly related to construction operations, in recent years we have also sought to mitigate the risks inherent in preliminary activities. In particular, we have focused on the bidding process, i.e., compliance with the procurement terms and conditions, and budgeting. The errors made in the planning stage are usually irreversible and, in a situation where the price is contractually fixed, may result in a direct financial loss.

Financial risks

Credit risk

During the period, we recognised credit losses of 37 thousand euros. A year earlier, credit losses totalled 506 thousand euros, comprising impairment losses on trade receivables of 97 thousand euros and impairment losses on other receivables of 409 thousand euros. The overall credit risk exposure of receivables is low because the solvency of prospective customers is evaluated, the share of public sector customers is large, and customers’ settlement behaviour is consistently monitored. The main indicator of the realisation of credit risk is settlement default that exceeds 180 days along with no activity on the part of the debtor that would confirm the intent to settle.

Liquidity risk

The Group remains exposed to higher than usual liquidity risk. At the reporting date, the Group’s current assets exceeded its current liabilities 1.04-fold (30 September 2016: 1.05-fold). The key factor which influences the current ratio is the classification of the Group’s loans to its Ukrainian associates as non-current assets and the banks’ general policy not to refinance interest-bearing liabilities (particularly overdrafts) for a period exceeding twelve months.

Because the political and economic situation in Ukraine is still complicated, we believe that the Group’s Ukrainian investment properties cannot be realised in the short term. Accordingly, at the reporting date the Group’s loans to its Ukrainian associates of 8,867 thousand euros were classified as non-current assets.

For better cash flow management, we use overdraft facilities and factoring by which we counter the mismatch between the settlement terms agreed with customers and subcontractors. Under IFRS EU, borrowings have to be classified into current and non-current based on contract terms in force at the reporting date. As at 30 September 2017, the Group’s short-term borrowings totalled 21,525 thousand euros, including factoring liabilities of 5,000 thousand euros. Based on our prior experience with banks, out of the above amount contracts of 13,759 thousand euros will be extended when their maturity dates arrive.

At the reporting date, the Group’s cash and cash equivalents totalled 8,062 thousand euros (30 September 2016: 7,288 thousand euros).

Interest rate risk

Our interest-bearing liabilities to banks have both fixed and floating interest rates. Finance lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is EURIBOR. During the period, interest-bearing borrowings grew by 4,018 thousand euros year on year. Factoring liabilities increased whereas loan and finance lease liabilities decreased slightly (see also the section Liquidity risk). At 30 September 2017, interest-bearing borrowings totalled 29,011 thousand euros (30 September 2016: 24,993 thousand euros). Interest expense for the first nine months of 2017 amounted to 487 thousand euros (9M 2016: 501 thousand euros).

The main source of interest rate risk is a possible rise in the variable component of floating interest rates (EURIBOR, EONIA or the creditor’s own base rate). In the light of the Group’s relatively heavy loan burden, this would cause a significant rise in interest expense, which would have an adverse impact on profit. We mitigate the risk by pursuing a policy of entering, where possible, into fixed-rate contracts when the market interest rates are low. As regards loan products offered by banks, observance of the policy has proved difficult and most new contracts have a floating interest rate. We have entered into a derivative contract to manage the risks resulting from changes in the interest rates of the finance lease contract for the acquisition of a new asphalt concrete plant.

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in the currency of the host country, i.e., in euros (EUR), Ukrainian hryvnias (UAH), and Swedish kronas (SEK).

The exchange rate of the hryvnia has been unstable because the political and economic environment in Ukraine continues to be complicated due to the conflict between Ukraine and Russia which broke out at the beginning of 2014. Moreover, at the beginning of 2015 the National Bank of Ukraine decided to discontinue determining the national currency’s indicative exchange rate. In the first nine months of 2017, the hryvnia weakened against the euro by around 9%. For our Ukrainian subsidiaries, this meant additional foreign exchange losses from the translation of their euro-denominated loans into the local currency. Relevant exchange losses totalled 247 thousand euros (9M 2016: 251 thousand euros). Exchange gains and losses on financial instruments are recognised in Finance income and Finance costs respectively. Translation of receivables and liabilities from operating activities did not give rise to any exchange gains or losses.

Our Ukrainian and non-Ukrainian entities’ reciprocal receivables and liabilities which are related to the construction business and denominated in hryvnias do not give rise to exchange losses. Nor do the loans provided to the Ukrainian associates in euros give rise to exchange losses that ought to be recognised in the Group’s accounts.

Due to movements in the Swedish krona/euro exchange rate in the first nine months of 2017, translation of operating receivables and payables resulted in an exchange loss of 8 thousand euros (9M 2016: an exchange loss of 5 thousand euros). The exchange loss has been recognised in Other operating expenses.

We have not acquired derivatives to hedge currency risk.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • At the end of 2017 and in 2018, public investment should grow slightly. However, it is still unclear for companies in which segments of the construction market and to what extent the state will be able to realise its investment plans. Although in the 2014-2020 EU budget period the support allocated to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), the portion that will influence the construction market will not increase. Instead, compared with the previous period, there will be a rise in allocations to intangible areas.
  • In the context of the market in general, investments made by the largest public sector customers (e.g., state-owned real estate company Riigi Kinnisvara AS and the National Road Administration) which will reach signature of a construction contract in 2017 will not increase substantially. The Ministry of Defence has been a positive exception for builders as its needs and activity in carrying out new procurement tenders and placing orders through a single agency, the Centre for Defence Investment, have made a significant contribution to market revival. Hence, the Estonian construction market as a whole (particularly infrastructure construction segments) will remain in relative stagnation. So far, the situation has been mitigated by the private sector’s buoyant investment in building construction but the latest developments reflect a certain slowdown also in the latter.
  • The long and painful process of construction market consolidation will continue, albeit slowly. In particular, this applies to general contracting in building construction where the number of medium-sized general contractors (annual turnover of around 15-40 million euros) is too large. Based on the experience of the last major crisis it is likely that in an environment of stiff competition and rising input prices some general contractors may run into difficulties which will be passed on to several other market participants.
  • Competition remains stiff across the construction market, intensifying in different segments in line with market developments. The rise in the average number of bidders for a contract reflects this. It is clear that in the new environment of rising input prices that has emerged in the past year, efficiency is the key to success. Regrettably, the number of materials producers, suppliers, and subcontractors that are trying to survive or succeed in a difficult environment by dishonest means, e.g., by supplying goods with concealed defects or considerably lower quality than the one recorded in the product certificate, has increased quite rapidly. If the trend continues, both construction service providers and end-customers will have to apply strict and thorough quality control measures to make sure that the outcome meets their expectations. Unfair competition is putting visible pressure on prices and the quality of the construction service. Unfortunately, the problem is also underpinned by the customers’ (including state institutions’ and state-owned companies’) increasing tendency to lower the bidders’ qualification requirements and prioritise quality more on paper than in practice.
  • In new housing development, the success of a project depends on the developer’s ability to control the input prices included in its business plan and set sales prices that are affordable for prospective buyers. Despite the market situation, the housing market sustained growth also in the first nine months of 2017, accounting for a somewhat disproportionately large share of the total construction market and thus amplifying associated risks.
  • There is a growing contrast between the stringent terms of public contracts, which require the builder to agree to extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc., and the modest participation requirements. Lenient qualification requirements and the precondition of making a low bid have made it relatively easy for an increasing number of builders to win a contract but have heightened the risks taken by customers in terms of funding, deadlines and quality during the contract performance phase and the subsequent warranty period.
  • The past year has brought a rise in the prices of construction inputs, particularly in building construction. At first, general contractors tried to absorb the cost increase by making margin concessions but their capacity for doing this has been practically exhausted. The construction market includes an increasing number of areas where changes in the environment (including materials producers’ rapid and successful entry into foreign markets) may trigger a sharp price increase. The rise in housing construction has lengthened the supply terms of various essential materials and services considerably, making it impossible to carry out all processes in the former optimistic timeframes. As a result, activities require more extensive planning or may need to be postponed.
  • The persisting shortage of skilled labour (including project and site managers) is restricting companies’ performance capacities, affecting different aspects of the construction process, including quality. Labour migration to the Nordic countries will remain steady and the number of job seekers who return to the Estonian construction market is not likely to increase considerably. All of the above sustains pressure for a wage increase, particularly in the category of the younger and less experienced workforce whose mobility and willingness to change jobs is naturally higher.


In Ukraine, we offer general contracting and project management services to private sector customers in the segment of building construction. Political and economic instability continues to restrict the adoption of business decisions but construction activity in Kiev and the surrounding area has not halted. In 2017, we will continue our Ukrainian operations primarily in the Kiev region but the preparations made in western Ukraine are also bearing fruit: in October, we signed a large-scale contract in Lviv. Based on our order book, we expect that in 2017 our operating volumes will remain at a level comparable to 2016. Despite the military conflict in eastern Ukraine, for Nordecon the market situation has not deteriorated compared with a year or two ago. Hard times have reduced the number of inefficient local (construction) companies and when the economy normalises we will have considerably better prospects for increasing our operations and profitability. The Ukrainian government’s recent crackdown on cash-in-hand work is definitely a step in the right direction, which in the long term should improve our position in the Ukrainian construction market. We assess the situation in the Ukrainian market regularly and critically and are ready to restructure our operations as and when necessary. Should the crisis in eastern Ukraine spread (which at the date of release of this report is highly unlikely), we can suspend our operations immediately. We continue to seek opportunities for exiting our two real estate projects, which have been put on hold, or signing a construction contract with a prospective new owner.


In Finland, we have provided mainly subcontracting services in the concrete work segment but, based on experience gained, have started preparations for expanding into the general contracting market. The local concrete work market allows competing for projects where the customer wishes to source all concrete works from one reliable partner. Our policy is to maintain a rational approach and avoid taking excessive risks.


We entered the Swedish market in July 2015, when we acquired a 100% stake in SWENCN AB, a company registered in the Kingdom of Sweden. In the Swedish market, we intend to offer mainly the construction of residential and non-residential buildings, particularly in central Sweden. On gaining experience in the new market, we have prioritised quality and the observance of deadlines and have therefore accepted lower profitability. As regards our longer-term goals and the plan to build a viable and strong organisation that would compete successfully in the Swedish market, we are positive about the developments so far and see potential for sustaining business growth and operating profitably in a large market when we have been able to stabilise order book growth at the desired level.


Nordecon (www.nordecon.com) is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine, Finland and Sweden. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. The consolidated revenue of the Group in 2016 was 183 million euros. Currently Nordecon Group employs close to 740 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

         Andri Hõbemägi
         Nordecon AS
         Head of Investor Relations
         Tel: +372 6272 022
         Email: andri.hobemagi@nordecon.com

Nordecon_investor presentation Q3_2017.pdf